1. Microeconomics

- Demand Law = inverse relationship between P & QD, all other factors assumed constant. A change in price causes a movement along the curve. A change in income, price related goods, consumer preference and demographic changes causes a shift of the curve. QD = a-bP (a=shift, b=slope)

- Supply Law = positive casual relationship between P & QD, ceteris paribus. A Change in price causes a movement along the curve. A change in Factors of Production (FoP = land, labour, capital, entrepreneurship), in technology, tax, subsidies causes a shift of the curve.

- Market Equilibrium = no excess supply or demand. – Price has a signaling and incentive function. Full efficiency achieved.

- Market Efficiency

Consumer Surplus = The difference between how much a consumer is willing and able to pay and what the real price, which they pay is.

Producer Surplus – the difference between what firms earn from selling goods and services and what they would have earned at P=minimum.

- Elasticity

Price Elasticity of Demand = responsiveness of QD to change in P

%changeQD/%changeP

>1 elastic, <1 inelastic

Used for prediction, comparison, price discrimination, tax.

Low for primary goods

High for manufactured goods

Cross Elasticity of Demand = responsiveness of D for good X to a change in P of good Y

%changeQDofX/%changePofY

>0 substitute (X), <0 complimentary (X)

Used to describe markets, determine types of goods

Income Elasticity of Demand = responsiveness of D to a change in Income

Asymmetric information – market failure may occur when either the buyer/seller possesses more info. Than the other party. Government response – legislation, regulation, provision of information

Abuse of monopoly power – able to restrict output, charge higher prices leading to a welfare loss. Government response – legislation, regulation, nationalization, trade liberalization.

- Theory of Firms and Market structures

Short run – time period during which at least one FoP is constant.

Long run – no constant factor of production, all adjustments are possible.

Total Product = Total output of a firm = Q

Average Product = Q/L

Marginal Product = changeQ/changeL

- The Law of Diminishing Returns – As more units of a variable factor (labour) are added to a fixed factor (capital) there is a point beyond which the total product will continue to rise, but at a diminishing rater, or the marginal product will decline.

- Economic Costs = the value of all resources that are sacrificed during the production process.

Explicit = production costs (wages, resources)

Implicit = minimum payment to secure entrepreneurship.

Fixed = costs, which do no vary when the level of production varies (rent, insurance)

Variable = vary with the level of output.

Marginal = the additional cost of producing an extra unit of output.

MC=changeTC/changeQ = changeVC/change Q

Average Variable = variable costs over the level of output

Average Total = total costs over the level of output

ATC = AFC+AVC

Average Fixed = Fixed costs over the level of output.

Long run production costs

Increasing returns to scale - %change increase in output > than %increase in all inputs

Constant returns to scale - %increase in all inputs

Decreasing returns to scale - %increase in output < than % increase in all inputs.

- Revenue

Total Revenue = TR = P x Q

Marginal Revenue = MR = changeTR/change

Average Revenue = AR = P

- Economic Profits

Abnormal = TR > economic costs

Normal = TR=Economic Costs or when TR is just sufficient enough to keep the firm in business. Π = TR – TC

- Marshal-Lerner condition = For devaluation/depreciation of a currency to improve a current account deficit the sum of the PED for imports and the PED for exports must be greater than 1. (J-Curve Effect)

- Economics Integration & Trade Liberalization

Trade Agreement – bilateral/multilateral – reduction tariffs, etc.

Trading Blocs

Free Trade Area – no barrier of trade to members

Customs Union – common external tariff

Common Market – free flow of Factors of Production

Economic Union – same macroeconomic policies

Monetary Union – same macroeconomic policies & free flow of FoPs & a common currency with a common central bank. (Euro Zone)

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